Broker Check
July Market Update- GDP looks backwards

July Market Update- GDP looks backwards

August 05, 2020

Second quarter GDP report reflects what did happen, not what will.

 

The U.S. economy contracted 9.5% through the second quarter, the worst single-quarter decline in gross domestic product (GDP) since the Commerce Department started tracking it in 1947. Keep in mind GDP historical measures ‘output’ or production growth in our nation.  Given the entire country was either strongly encouraged or mandated by law to dramatically decrease that activity (if not shut down completely), so it has long since been expected that the report would show a major dip.  We are hearing a lot confusion as to why/ how the market can be holding up so well when GDP is down and Covid-19 cases are up.  The short answer to that complex question is that companies are valued, not on what they have done, but what they will do. 

 

When Covid hit initially, we had no idea how bad it was going to get and worst case scenarios on what companies ‘would do’ looked pretty grim, hence the sharp market decline.  Today, even though we don’t know exactly how it plays out, we know a number of ways that it won’t play out (not an apocalypse, won’t wipe out ½ the nation, etc. ).  We also know we can adapt in many ways, we know how to be reasonably protective of ourselves, and while we know some areas are still struggling (airlines, cruise ships, etc.), we know some areas of business are doing fantastically well (areas of real estate, technology, etc).  The US economy clearly is not being brought to its knees by Covid in the medium to long term (although for a while it did), so if there is a strong sense that earnings either are or will be strong shortly, I would ask the question the other way around and phrase it to say “Why wouldn’t the market be where it is, pending higher moves as the situation improves?”

 

As mentioned before, trillions in stimulus already in play with very likely more trillions to come will have an effect and low rates will likely be maintained to stimulate things to keep moving in the right direction.  Broadly speaking, consensus earnings estimates are higher a few quarters from now than they were a few quarters ago, and earnings lead to profits and profits lead to return on investment in the long run, so that’s the focus we maintain.

 

As life continues despite these challenges, we hope you are finding moments of joy and that you and your families are experiencing good health and wellness. As always, we encourage you to reach out if you have any questions, about the markets, your financial plan or anything else. Thank you for your continued trust.

 

Additionally, here are a number of details on ongoing developments that we are keeping our eye on.

 

July 2020

 

6/30/20 Close

7/31/20 Close

Change
Month to Date

% Gain/Loss Year to Date

DJIA

25,812.88

26,428.32

+615.44

+2.38%

NASDAQ

10,058.77

10,745.27

+686.50

+6.83%

S&P 500

3,100.29

3,271.12

+170.83

+5.51%

MSCI EAFE

1,775.53

1,820.21

+44.68

+2.52%

 

 

Year to Date 2020

 

12/31/19 Close

7/31/20 Close

Change
Year to Date

% Gain/Loss Year to Date

DJIA

28,538.44

26,428.32

-2,110.12

-7.39%

NASDAQ

8,972.61

10,745.27

+1,772.66

+19.76%

S&P 500

3,230.78

3,271.12

+40.34

+1.25%

MSCI EAFE

2,036.96

1,820.21

-216.75

-10.64%

Performance reflects price returns as of market close on July 31, 2020.

Bottom line

  • We believe the positives of global stimulus and low rates outweigh the potential negatives, Joey Madere, senior portfolio analyst, Equity Portfolio & Technical Strategy said. Though we expect volatility, moments of market weakness should be seen as an opportunity.
  • There is reason to be watchful, but strong corporate earnings, positive vaccine news and a commitment from policymakers should alleviate broader concerns.
  • Currently, the markets will be watching stimulus package developments in Washington closely, but after that, attention will likely turn to the November elections as candidates reveal policy plans.

 

Economy

  • Rising COVID-19 cases and weekly claims for unemployment benefits remain at high levels, which could be significant headwinds for recovery, Chief Economist Scott Brown said.
  • GDP fell sharply in 2Q20. Weakness was widespread, but especially pronounced in consumer services, transportation equipment and energy exploration.
  • Consumer spending figures for May and June showed a sharp, but partial rebound, but the future patch will depend on the virus, efforts to contain it and the amount of fiscal support.

 

Equities

  • Positive S&P 500 performance is masking pressures below the surface, since about half of the index’s companies are technology or health care, two sectors well positioned for the pandemic environment. Looking outside the index, 40% of all stocks are down over 20% from their 52-week high points.
  • Recent stock performance is split along other lines as well, said Madere. “Large stocks are dominating small ones, growth is dominating value, and non-dividend payers are dominating dividend payers.”
  • “We continue to stick with the sectors best positioned for this environment – tech, health care, communications services – along with consumer discretionary because of pockets of strength with e-commerce and the effect of government stimulus boosting consumer spending,” Madere said.
  • Energy companies are keeping a close eye on the elections, notes Pavel Molchanov, equity research analyst. Presumptive Democratic presidential nominee Joe Biden has pledged to invest $2 trillion over four years to transition toward low-carbon energy and also enact a strict timeline for nationwide carbon reduction, which could be a tough sell, even with a Democratic Senate. However, presidents have more leeway on regulatory matters that don’t require congressional support.
  • Second-quarter corporate earnings season surprised on the upside, with aggregate results 11.5% above estimates, and well above the five-year average of 4.7%. Industrials and health care are taking the lead here.

 

International

  • A number of major global currencies gained value against the U.S. dollar in July, including the euro, British pound, Japanese yen and Chinese yuan.
  • The continuation of suppressed coronavirus cases in Asia and across Europe manifested in firmer near-term economic indicators for the regions, providing some hope for recovery, European Strategist Chris Bailey said.
  • There are growing concerns about new legislation impacting Hong Kong’s relationship with mainland China. The U.K. has followed the U.S.’s lead in blocking major Chinese suppliers from participating in 5G wireless network buildouts. Other nations have shown reluctance in following this lead.

 

Fixed Income

  • The bond market seems to be taking very little direction based on economic data, as it has been driven primarily by central bank policy, said Doug Drabik, managing director for fixed-income research.
  • State and local government revenues are far behind budgets, but spending has remained largely where it was at the beginning of the year, Chief Fixed Income Strategist Kevin Giddis said. Municipal bond buyers will be paying special attention to see if states and municipalities are included in the next federal stimulus package.
  • Investment-grade BBB-rated corporate bond spreads narrowed again for the third consecutive month. Demand for high-quality corporate bonds remains strong.
  • High-yield spreads have also narrowed, in part due to demand and continued investor pursuit of any kind of yield, Drabik said.

 

 

Best Regards,

 

 Brad Hudson, CFP®, CIMA®, AIF®

 

 

CERTIFIED FINANCIAL PLANNER™ | Certified Investment Management Analystâ„  | Accredited Investment Fiduciary®

Branch Manager

5129 Oleander Dr., Suite 202 | Wilmington, NC  28403
910.399.7765 • 1.888.588.0878
1.866.550.8542 Fax

Brad.Hudson@raymondjames.com

SoundHarborWealthPartners.com

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.

© 2020 Raymond James Financial Services, Inc., member FINRA/SIPC. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc.  Sound Harbor Wealth Partners is not a registered broker/dealer and is independent of Raymond James Financial Services. 

 

Raymond James Financial Services does not accept orders and/or instructions regarding your account by email, voice mail, fax or any alternate method. Brad Hudson does not give tax or legal advice.  Please consult your tax or legal advisor before making any tax or legal decisions. Transactional details do not supersede normal trade confirmations or statements. Email sent through the internet is not secure or confidential. Raymond James Financial Services reserves the right to monitor all email. Any information provided in this email has been prepared from sources believed to be reliable, but is not guaranteed by Raymond James Financial Services and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only and does not constitute a recommendation. Raymond James Financial Services and its employees may own options, rights or warrants to purchase any of the securities mentioned in this email. This email is intended only for the person or entity to which it is addressed and may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient is prohibited. If you received this message in error, please contact the sender immediately and delete the material from your computer.

 

If you would like to execute a trade or if you have time-sensitive information for me, please call my office at 910.399.7765 or 1.888.588.0878

 

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of Raymond James and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. An investment cannot be made in these indexes. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.

Material prepared by Raymond James for use by its advisors.

 

To opt out of receiving future emails from us, please reply to this email with the word “Unsubscribe” in the subject line. The information contained within this commercial email has been obtained from sources considered reliable, but we do not guarantee the foregoing material is accurate or complete.